Consumption Smoothing in Micro Credit Programs

This paper is an empirical analysis using the Eulers equation to evaluate the long term effects of microcredit programs by estimating the consumption smoothing ability of participating households. It shows that consumption differentials across seasons are inversely related to length of membership. The findings of the paper are:

• If more members develop a strong bargaining position through the accumulation of wealth, they can withstand seasonal shocks to household;
• The enhanced ability to buffer consumption against shocks indirectly captures the house holds' long run capacity to survive independently without aid;
• It is the length of membership that is pivotal in reducing seasonal changes in per capita consumption.

The paper states that participation in micro-credit programs improves the ability of members to withstand the aggregate shock that cause seasonal consumption changes.

• Credit is provided for non-agricultural self employment activities which establish a source of income for the household that is unlikely to be affected by agricultural shocks;
• Since the majority of participants are females, credit succeeds in diversifying income within a household.

This paper contributes to the research:

• By examining the effect of participation on consumption smoothing benefits;
• By highlighting possible repercussions of differing member incentives on program effectiveness.

The paper reaches the following conclusions:

• Length of membership reduces fluctuations in household's cost of borrowing;
• Households with experienced participants face lower cost of reducing seasonal consumption differentials;
• One year increase in membership of female participant reduces percentage change in per capita consumption by a unit shock, by 6%.